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Is Disability Income Taxable?

According to the IRS, any income in the form of compensation is liable to taxation. Yet this taxation criteria depends on who pays for the disability compensation.
Scholasticus K Nov 20, 2018
Publication 907 by the Internal Revenue Service (IRS) explicitly states that income from any benefit received in the form of disability insurance compensation becomes taxable depending upon the person's income, the provider or contributor of the premium of the insurance, and insurer or the insurance company.
Here is a small summary of the tax laws, norms, and rules that can come in handy while you file your income tax returns and avail some or the other deduction.

Taxing Disability Benefits

The first type of disability benefit mentioned by the IRS is dependent care benefit. Here the value of dependent care at a fair market value, or the allowance tiredly paid to you for the same or any pre-tax contribution made by you in such a case is included in your annual income.
In case where the care plan is a qualified dependent care plan then, Part III of the 2441 is to be filled for the claimed exclusion, which is often granted. If you are self-employed, then you can get a deduction for a qualified program.
An amount you exclude, under the law of exemptions on tax return, as in the first case or deduct as the second case, is limited to the smallest of:
  • Total sum that you spend on dependent care for the year, or
  • Total amount of qualified expenses that you incurred, or
  • Total income you earned in the year or the income of you spouse, or
  • Simply USD 6,000
Basically, if you are receiving any unrecognized benefit, allowance, or direct provision for disabled dependent care, you will need to include it into the income. If you have a recognized or qualified plan, you can avail exclusion. You will have to check the qualifying conditions for the person, and will also have to submit some specified forms.
In the second case, that is a Social Security benefit (also known as Social Security Disability Insurance) or a Railroad Retirement Benefit, a part of the income is taxed. In cases where you received the Social Security benefit (sometimes known as only social security) or the Railroad Retirement Benefit, as your only income, you won't have to file a return.
There are exceptions to this rule. In cases where you receive an income apart from the Social security benefit or the railroad retirement benefit then there are some compliances which you will have to go through.
In such a case, if your income (not including the benefit) plus the tax exempt interest plus half of your benefits exceed:
  • USD 10,400 if single and under 65 years of age, and USD 11,950 if single and 65 years or older.
  • USD 13,400 if head of the household, and under 65 years of age, and USD 14,950 for the head of household 65 years or older.
  • USD 16,750 if widow or widower, and under 65 years of age, and USD 18,000 if widow or widower and 65 years or older.
  • USD 4,050 in cases where you are married, but filing separately, and are of any age.
  • USD 20,800 if married and filing jointly, and both spouses are under 65 years of age.
  • USD 22,050 if married and filing jointly, and one of the spouses is 65 years or older.
  • USD 23,300 if married and filing jointly, and both spouses are 65 years or older.
In such case your benefit is partially taxable. In case if you are receiving Supplemental Security Income (SSI), it is totally tax-free and are not to be included in the income.
If you have retired on a disability, the pension that you receive as Disability pension is included in your income. Further, your taxable disability payments need to be included in the wages column on the Form 1040, till you reach the minimum retirement age.
For pension included as income, Publication 525 of IRS gives certain pensions provided by the military or government pensions as wages or incomes. The veteran's benefits are not to be included in any income irrespective of their nature. So disability income taxation rules are not applicable to the veteran's benefit, provided by military or government.
There are certain disability benefits that one may receive. These are non-taxable:
  • Benefits from public welfare fund
  • Workers compensation of occupational sickness
  • Damage for physical injury (not punitive)
  • Benefits received by no fault policy of a car insurance against a loss of earning capacity, for the time being
  • Compensation against permanent disfigurement
There are several such terms and conditions that may apply. Hence, it is best to take a look at all classifications and taxation elements of the compensation, benefits, and all other allowances or reimbursements that you receive against a disability. When in doubt, contact the helpline of the IRS or see a recognized attorney or accountant.
Apart from the aforementioned deductions, itemized deductions and additional deductions apply to the disability income. In a short term disability you can make use of itemized deductions as they are considerably advantageous.